Are Hedge Fund ETFs Working?

Are hedge fund-oriented strategies, as implemented by exchange-traded funds (ETF), attractive? To investigate, we consider six ETFs, two live and four dead (in order of inception dates):

• IQ Hedge Multi-Strategy Tracker (QAI) – seeks to track, before fees and expenses, risk-adjusted returns of a collection of long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging markets hedge funds.
• ProShares Hedge Replication (HDG) – seeks to track, before fees and expenses, an equally weighted composite of over 2000 hedge funds.
• AlphaClone Alternative Alpha (ALFA) – seeks to track price and yield, before fees and expenses, of U.S.-traded equity securities to which hedge funds and institutional investors have disclosed significant exposures. (This fund is dead as of August 2022.)
• IQ Hedge Market Neutral Tracker (QMN) – seeks to track, before fees and expenses, risk-adjusted returns of market neutral hedge funds. (This fund is dead as of January 2023.)
• ProShares Morningstar Alternatives Solution (ALTS) – seeks to track, before fees and expenses, performance of a diversified set of alternative ETFs. (This fund is dead as of April 2022.)
• JPMorgan Diversified Alternatives (JPHF) – aims to provide direct, diversified exposure to hedge fund strategies via a bottom-up approach across equity long/short, event-driven and global macro strategies. (This fund is dead as of May 2020.)

We focus on monthly return statistics, including compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). We use two benchmarks, SPDR S&P 500 (SPY) and the Eurekahedge Hedge Fund Index (HFI). Using monthly returns for the six hedge fund ETFs and SPY and for HFI as available through August 2023, we find that: (more…)